Why we are unable to achieve equitable distribution of wealth
Posted by: Uma Shashikant on Jan 30, 2017, 06.30 AM IST
Inequality of wealth bothers us. In a poor country like ours, we find it obnoxious that a few wealthy individuals own more than what half the population does.
There must be something wrong in a system that hands over too much to too few, leaving so many behind. We curse the capitalistic system for enabling the few to amass wealth.
Something is surely wrong, but we do not know how to fix it. There is still no proof that robbing the wealthy can enrich the poor. We know that wealth should be redistributed, but we still do not know how that can be achieved effectively.
How did the wealthy become so wealthy? We do not live in the times of land looters and gunmen, nor is the list of the richest filled with those who found oil or precious minerals in their backyard. The modern history of wealth is about the twin tools of equity and leverage.
The wealthiest today are those who were able to build large businesses, using their capital to begin with, but soon leveraging the use of borrowing to grow their enterprises into large entities.
The value of the equity stock they own has moved up as they created value in their enterprise. The accumulated wealth of capital is mostly exempted from tax, as an incentive for businesses that contribute to economic growth.
Equity and leverage could well be the story of the wealth of simple folks too. The salaried middle class of India in the last 20 years has enhanced its wealth using the same tools. It would not have been possible for millions to own homes, if they could not access loans.
Using the power of future cash flows from their jobs and professions, households got to own assets that were a multiple of their annual incomes. That is the power of leverage. We do not grudge a middle-class house owner his wealth, as we see it as an assiduous way of building assets.
The wealthy entrepreneurs did not just use leverage. Not always either. They created enterprises, working on an idea, an innovation, an opportunity, and created value. For themselves and for others. Stories of capitalism are stories of entrepreneurial dream open to everyone who dared, where not just wealth, but products and services that millions consume are made; jobs are created; and taxes paid to the government.
Not everyone succeeds, and not everyone is willing to take the risk. The rewards are the lure. There is no robbery in the process, considering that information about listed enterprises is in the public domain and these businesses are subject to laws of the land. Then where is the resentment coming from?
The damage is a question of morality and ethics. Not finance and economics. Once it was known that the value of the equity shares they held had to be maximised, enterprises began to work with that objective in mind. In the 1970s, the idea of profit maximisation as the sole business objective was entrenched, and myopic business practices began.
It was followed by the principal-agent relationship between shareholders and managers, where managers had to be incentivised with share options and Esops to share the goal of value maximisation. By the 1980s, leveraged buyouts were upon us when firms could use leverage to acquire questionable assets to enhance shareholder value.
In the 1990s, short-termism took over. A new breed of investors (angels, private equity, venture capitalists), who were willing to strategically invest in small enterprises and take them public arrived. They were followed by hedge funds, speculators and traders, who could use trading strategies, across time zones, and technology to churn money to make more money.
By the turn of the century, companies were borrowing heavily to buy back their own shares, so that prices were enhanced. These harmful outcomes gave capitalism a bad name.
2008 was a reminder of how far removed the practices of modern enterprises had swerved from the real economy comprising value-add for the larger economy and households that seek jobs, stability of income, and long-term wealth creation. The bail-out of the large banks, while ordinary households lost jobs, assets and homes rile many.
In the modern world of high business risk, and short cycles of boom and bust, household incomes have come under high risk. But the same conditions have made equity owners wealthy. When it becomes tough to justify wealth accumulation as deserving and just, resentment grows.
The overt focus on economics of things has meant that the social, political and welfare implications of capitalism have not received adequate attention. Large businesses fund elections, and there is research to show how policy making is thus biased. In corrupt politics of nations, the role and function of the state is compromised by elected representatives who are mere rent seekers.
When the rich take over society, roads are designed for the car, not pedestrians; art is owned by those who can pay for it; and health, education, infrastructure and public goods do not receive policy attention, we end up with morally depraved societies for the wealthy.
Therefore, redistribution of wealth has returned to the discussion table, even in the richest country in the world, the US. There are raised voices asking for tax havens to be shut down; for wealth and inheritance to be taxed; for capital gains and dividends to be taxed; and for increased role of the State in posting money (negative taxes) into the bank accounts of the poor.
But tax measures can be subverted by the rich unless global political will and synchronous action across regimes is obtained, which is tough. Direct welfare measures require an empowered state to redistribute equitably, a condition most ruling formations are unlikely to meet.
No one denies that economic growth is the lasting antidote to poverty. The enrichment of human capital in terms of good health and education, and equitable access to economic opportunity is the long-term foil to inequality in wealth.
That requires effective investment on a large scale. How will we find the money, political will, and executional excellence to pull that off?
(The author is Chairperson, Centre for Investment Education and Learning.) This article appeared in Economic Times dated Jan 30, 2017, 06.30 AM IST